Here’s why new home prices will be headed down for awhile– Inventory is at level not seen in 35 years, and more houses keep on coming:
Almost 200,000 newly constructed single-family homes are sitting empty in the U.S., the most since Commerce Department statistics began in 1973. Partially completed developments reduce revenue for cities and towns and hurt businesses, said Nicolas Retsinas, the director of Harvard University’s Joint Center for Housing Studies.
About 370,000 new homes are for sale because people who initially contracted to buy them backed out, according to estimates in a Feb. 15 report from analysts at New York-based CreditSights Inc. An additional 216,000 homes are under construction, according to Commerce Department data.
In January 1973, the number of finished new homes for sale was 97,000, when the U.S. population was about 212 million, according to the U.S. Census Bureau. In December 2007, 197,000 completed homes were on the market and in January 2008 there were 195,000. The current population is 303.5 million.
Homebuilders would like a hand from Uncle Sam to unload a few of these:
“The biggest bang for the buck most likely would be provided by a temporary home buyer tax credit,” NAHB Chief Economist David Seiders told the Senate Finance Committee. “Tax credits for the purchase of a home are a means of eliminating excess inventory, relieving some of the pressure on falling housing prices and ending the waiting-on-the-sideline strategy some potential buyers have adopted in response to overly negative media stories concerning the future of the housing market.”
Homebuilders however, need to consider their own role in this. They are the guys that produced the excess inventory that is driving down the markets. As long as excess housing is being produced, they will put more downward pressure on home prices. If the incentives being offered by homebuilders isn’t akreadt bringing in the buyers, why would similar amounts in tax incentives be any different?
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Yes. What did that Federal Reserve Governor call them, a year and a half ago? Oh yeah… “New ghost towns of the west..”
I think the next source of mass employment is going to be suburb dismantling. Picture all the resources that can be recycled from pristine, valueless new homes…. lumber…. roof tiles… nails… blow-on stucco…. copper wire …. galvanized pipe …. metal fixtures. …. and chipboard!!! Wow. We’re going to hit the jackpot once we figure out a good recycled use for chipboard.
It will be the US’s new natural resource!
Right beside our unparallelled financial acumen, our manufacturing philosophy, and our overconsumption.
Yossarian-
I discovered they actually have a term for unwanted homes. I was reading an article not too long ago in the Dayton paper about how old abandoned homes there that were considered a blight on the neighborhood were declared “nuisance houses”. Nuisance houses are demolished– the article was about how the city was having a hard time keeping up with them.
Maybe in areas like LV and Phoenix we will at least have “economy of scale”, we can just declare them “nuisance neighborhoods” and take them all out at the same time.
Who are these fence sitters they keep talking about. Anyone with a pulse and the will bought between 2001 and 2006. I don’t think there are that many fools left everyone else is waiting for the crash.
Twist:
Economies of scale.. that’s what I was thinking… could have a hundred unemployed men working, carefully disassembling the houses… I can see large separate piles of lumber, chipboard, OSB board, fixtures, etc.
You could have one tent set up to serve lunch, a couple of porta-potties.
It would be the WPA of the early 21st century.
We just have to find a use for all that fake stucco and chipboard.
Builders need to adjust to the huge change in market conditions, and some of them are starting to. The trend of building much bigger homes and McMansions just no longer makes economic sense today. If buyers can no longer get zero down and ARM teaser loans, the builders will be forced into making homes that these people truly can afford to buy. Many builders are adjusting their plans accordingly, and are now focusing on building smaller homes with a lot less space to heat and cool. In the current economic climate of smaller families and skyrocketing energy costs, this is the only business model that will make any sense.
WizeOne-
The difficulty being that the current inventory also has a lot of smaller homes in the mix- those were the favored “investment” of the flippers.
You are right about the demand shifting to smaller homes though. When you think appreciation is going to remain in the double digits, then bigger is better. In a world of falling values, a huge house, big utility bills and a lot of yard work, especially if the kids are grown and gone, the McMansion thing loses it’s appeal.
Hey twist and all,
You’re right; this is the next government charity drive: The Mega Homebuilders
and, this stuff is just in the top of the first inning, IMO
what’s the next bailout? the bond markets?
The bigger houses are a big drag for homeowners in states like Wisconsin that have such steep property taxes. Urban density is going to be the next big thing, but mostly comes in the form of cheaply built and not very energy efficient condominiums it seems.
I to think that people are out of money, good jobs, and affordable living is not as affordable as it once was.
Toys,
Good summation. Old money is running out and prices have to decline. Inventory is going to continue to climb.
Oddly enough when you clear out old housing it is called downsizing a city. My BiL coined the term, and has written on it a bit. USATODAY had a write up on it years ago.
http://pqasb.pqarchiver.com/USAToday/access/32023856.html?dids=32023856:32023856&FMT=ABS&FMTS=ABS:FT&date=Jul+15%2C+1998&author=Haya+El+Nasser&pub=USA+TODAY&edition=&startpage=03.A&desc=Cities+%27downsizing%27+with+bulldozers+Demolition+is+answer+to+urban+blight
Metroplexual:
That’s a phrase that people in The Valley of The Sun need to embrace…. ‘downsizing Chandler, Phoenix, Queen Creek…. etc.’
The Southwest has been on a growth spurt so long, people have forgotten that there are limits to growth.
My two favorite economists that help explain the problem … Schumpeter, for his ‘creative destruction’ theory …. Thomas Malthus for his theories regarding population growth and collapse.
Be good.
I am not a Malthusian, I embrace the philosophy of Julian Simon. That said, there are limits to the carrying capacity of a region and generally water is the limiting factor in a modern city.
As for Schumpeter, it has certainly been applied to American cities and to our detriment at times. The old Penn Station was supposed to have been a marvel and now we have a crappy Madison Square Garden in its place.
Nobody has commented on the numbers presented in this report. The aggregate of total empty new homes potentially is quite staggering.
As of January 2008:
195,000 completed homes
+ 370,000 new homes contract sale backed out
+ 216,000 homes are under construction
= 781,000 EMPTY HOMES
No doubt some fraction will be bought but no mention of a comparative absorbtion rate. But they are still building them! It’s hard to stop a freight train on a dime. I bet by summer there will be fewer than 10,000 homes under construction.
WOW! I guess everyone went to bed early. Monday is going to be very interesting. Asian markets down 3-4%. Special Fed meeting set. CFC/BOA may not work. And this troubling link I picked up on the CR blog.
The Federal Reserve’s rescue has failed
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/03/ccview103.xml
I need extra PM’s tonight.
brucewho:
No, I couldn’t go to bed after seeing the nikkei disaster unfolding. Bad, bad news. I’m going to now do something I have been debating… I’ll call Europacific capital in the morning and set up an account, start transferring money to Peter Schiff’s outfit… out of dollar assets, and into Asian utilities stocks, etc… safe stuff, way safer than holding dollars. Gotta do it this week, no matter what the market does.
What I most fear now is what Soros said a month ago… the dollar will lose its reserve currency status in the world.
All kinds of bad things could happen with even a moderate run on the dollar. Import substitution is going to be a severe problem, possibly within the year. Think about what happened to Argentina a few years ago… we’re in for a taste of that. I’m almost completely out of the stock market, but have only about 35k in physical gold. It’s going to be a very nice hedge, but that’s not enough.
Think a severe recession and 150 dollar a barrel oil will affect housing?
There was an article in the Wall Srreet Journal about how slow a process it will be for the dollar to lose its reserve status. It was convincing. It even talked about how slow the process was when the British Pound lost its status. It took over 40 years. Granted, we may already be about 5 years into the process.
Dan
Bruce-
Gilbert, AZ was the poster child of unbridled building– it was in the top five fastest growing city in the US for several years. There was an article last week on how the town of Gilbert was looking at layoffs as the impact fees have dropped so much. At the height of the boom Gilbert was issuing 500+ building permits/month. In January they issued 40, but refunded 38 for a net of TWO PERMITS.
Builders are still at it, and I believe still building at too high a rate, but they have slowed way, way down.
Bruce-
My plane was in late last night, but I saw the Nikkei right before I went to bed. I’m assuming markets will be down today, but who knows. CNBC might report a rumor that something sunny might happen somewhere and the market takes off. That said, the handwriting is on the wall for the long term trend, and it’s not pretty.
Twist-
It’s just past noon here in Denver. The DOW is only moderately down. Obviously a lot of shorts covering. The big news is the continued rise in PM and Oil. Where else to put your dollars as the $ is in historic low territory. Sorry Yos I think even oversees investing is problematic. This is a worldwide problem they can’t decouple from. Housing was the canary in the coal mine. Igor smells disaster.